-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RrF0ipwykYDHdMcrBqtrDOBxaipJiijDQT7HD33lHVNQbQZjemr/tVFnwgx2+Mp2 N2WshOGZelDoHudMIiRAGw== 0000930661-99-002877.txt : 19991221 0000930661-99-002877.hdr.sgml : 19991221 ACCESSION NUMBER: 0000930661-99-002877 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE RESOURCES PLC CENTRAL INDEX KEY: 0000937568 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24691 FILM NUMBER: 99777741 BUSINESS ADDRESS: STREET 1: 4200 EAST SKELLY DRIVE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 MAIL ADDRESS: STREET 1: JENKENS & GILCHRIST PC STREET 2: 1445 ROSS AVENUE SUITE 2900 CITY: DALLAS STATE: TX ZIP: 75202 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE XX SECURITIES EXCHANGE OF 1934 ---- For the quarterly period ended October 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ---- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to ______________ Commission file number : 000-24691 Alliance Resources PLC ---------------------- (Exact name of registrant as specified in its charter) England and Wales 73-1405081 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (918) 491-1100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- As of October 31, 1999, there were 47,487,142 shares of the Registrant's ordinary shares outstanding and 10,000,000 shares outstanding of the Registrant's convertible restricted voting stock. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page Consolidated Condensed Balance Sheets as of October 31, 1999 and April 30, 1999 2 Consolidated Condensed Statements of Operations for the six months ended October 31, 1999 and 1998 3 Consolidated Condensed Statement of Stockholders' Deficit And Comprehensive Income for the six months ended October 31, 1999 4 Consolidated Condensed Statements of Cash Flows for the six months ended October 31, 1999 and 1998 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Analysis on Market Risk 13 PART II - OTHER INFORMATION The information called for by Item 1. Legal Proceedings, Item 2. Changes in Securities, Item 3. Default Upon Senior Securities, Item 4. Submission of Matters to a Vote of Security Holders, Item 5. Other Information has been omitted as either inapplicable or because the answer thereto is negative. Item 6. Exhibit and Reports on Form 8-K 16 SIGNATURES 17 Cautionary Statement Regarding Forward Looking Statements In the interest of providing the Company's stockholders and potential investors with certain information regarding the Company's future plans and operations, certain statements set forth in this Form 10-Q relate to management's future plans and objectives. Such statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained in this Form 10-Q or otherwise expressed by or on behalf of the Company are, to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Forward looking statements involve known and unknown risks and uncertainties which may cause the Company's actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, the Company's ability to replace and expand oil and gas reserves, and such other risks and uncertainties described from time to time in the Company's periodic reports and filings with the Securities and Exchange Commission. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected, estimated, or predicted. 1
ALLIANCE RESOURCES Plc AND SUBSIDIARIES Consolidated Condensed Balance Sheets October 31, 1999 April 30, 1999 (unaudited) (audited) ---------------- -------------- ASSETS Current assets: Cash $ 1,082,579 $ 286,158 Accounts receivable - trade 2,094,509 2,105,082 Other current assets 89,849 59,837 ------------ ------------ Total current assets 3,266,937 2,451,077 ------------ ------------ Property, plant, and equipment, at cost: Oil and gas properties (using full cost method) US properties 43,081,616 42,901,608 UK properties 37,794,604 31,054,083 Other depreciable assets 926,385 1,095,147 ------------ ------------ 81,802,605 75,050,838 Less accumulated depreciation, depletion and impairments (48,355,774) (44,695,726) ------------ ------------ Net property, plant and equipment 33,446,831 30,355,112 ------------ ------------ Other assets: Deposits and other assets 413,997 141,422 Deferred loan costs, less accumulated amortization 2,868,718 3,215,384 ------------ ------------ Total other assets 3,282,715 3,356,806 ------------ ------------ TOTAL ASSETS $ 39,996,483 $ 36,162,995 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable $ 6,273,782 $ 7,238,502 Current portion of long-term debt 1,539,167 - Accrued expenses payable 1,888,136 833,750 ------------ ------------ Total current liabilities 9,701,085 8,072,252 Long-term Liabilities: Long-term debt (net of discount of $6,207,528 and $6,897,502 at October 31, 1999 and April 30, 1999, respectively) 51,405,001 43,176,621 Convertible subordinated unsecured loan notes 1,550,700 1,550,700 ------------ ------------ Total liabilities 62,656,786 52,799,573 ------------ ------------ Stockholders' deficit: Ordinary shares - par value 1 pence; 768,823 768,823 415,001,376 authorized; 47,487,142 issued and outstanding at October 31, 1999 and April 30, 1999 Deferred shares - par value 1 pence; 19,611,767 19,611,767 1,414,998,624 authorized; 1,217,155,912 issued and outstanding at October 31, 1999 and April 30, 1999 Convertible shares - par value 1 pence; 278,000 278,000 10,000,000 authorized; 10,000,000 issued and outstanding at October 31, 1999 and April 30, 1999 Additional paid-in-capital 21,042,094 21,042,094 Accumulated other comprehensive loss (17,553) (17,391) Accumulated deficit (64,343,434) (58,319,871) ------------ ------------ Total stockholders' deficit (22,660,303) (16,636,578) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 39,996,483 $ 36,162,995 ============ ============ See accompanying notes to consolidated condensed financial statements
2
ALLIANCE RESOURCES Plc AND SUBSIDIARIES Consolidated Condensed Statement of Operations Three Three Six Six Months Ended Months Ended Months Ended Months Ended October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998 ---------------- ---------------- ---------------- ----------------- Revenue: Oil and gas revenue $ 3,311,774 $ 2,031,805 $ 4,798,635 $ 3,949,771 Operating expenses: Lease operating expense 1,656,134 493,204 2,613,061 1,462,559 Depreciation, depletion, and amortization 967,407 632,697 1,369,762 1,142,052 Impairment of oil and gas properties 500,000 - 2,499,824 - General and administrative expense 845,741 828,410 1,581,839 1,578,672 ------------ ------------ ------------ ----------- Total operating expenses 3,969,282 1,954,311 8,064,486 4,183,283 ------------ ------------ ------------ ----------- Net operating income/(loss) (657,508) 77,494 (3,265,851) (233,512) ------------ ------------ ------------ ----------- Other income (expense): Loss on sale of assets - - - (9,184) Interest expense, net of interest capitalized (2,007,000) (550,790) (3,126,792) (1,219,240) Write-off of deferred loan costs - (869,906) - (869,906) Interest income 9,869 6,857 16,246 12,116 Miscellaneous income/(expense) 338,520 (82,653) 352,834 49,741 ------------ ------------ ------------ ----------- Net loss from continuing operations before income taxes (2,316,119) (1,418,998) (6,023,563) (2,269,985) Income tax expense - - - - ------------ ------------ ------------ ----------- Net loss (2,316,119) $ (1,418,998) $ (6,023,563) $(2,269,985) ============ ============ ============ =========== Loss per share for ordinary shareholders $ (0.04) $ (0.05) $ (0.11) $ (0.07) ============ ============ ============ =========== Weighted average number of shares outstanding 52,487,142 31,390,272 52,487,142 31,299,840 ============ ============ ============ =========== See accompanying notes to consolidated condensed financial statements
3 ALLIANCE RESOURCES Plc AND SUBSIDIARIES Consolidated Condensed Statement of Stockholders' Deficit and Comprehensive Income/(Loss) Six Months Ended October 31, 1999
Accumulated Other Ordinary Deferred Convertible Additional Comprehensive Accumulated Shares Shares Shares Paid-in-Capital Income (Loss) Deficit Total --------- ------------ ----------- --------------- ------------- -------------- -------------- Balance at April 30, 1999 $ 768,823 $ 19,611,767 $ 278,000 $ 21,042,094 $ (17,391) $ (58,319,871) $ (16,636,578) Comprehensive income (loss): Foreign exchange - - - - (162) (162) Net loss current period - - - - - (6,023,563) (6,023,563) Total comprehensive loss (6,023,725) --------- ------------ ----------- --------------- ------------- -------------- -------------- Balance at October 31, 1999 $ 768,823 $ 19,611,767 $ 278,000 $ 21,042,094 $ (17,553) $ (64,343,434) $ (22,660,303) ========= ============ =========== =============== ============= ============== ==============
See accompanying notes to consolidated condensed financial statements 4 ALLIANCE RESOURCES PLC AND SUBSIDIARIES Consolidated Condensed Statement of Cash Flows
Six Months Six Months Ended Ended October 31, 1999 October 31, 1998 (unaudited) (unaudited) Cash flows from operating activites: Net loss $ (6,023,563) $ (2,269,985) Adjustments to reconcile net loss to net cash used in operating activites: Depreciation, depletion and amortization 1,369,762 1,142,052 Impairment of oil and gas properties 2,499,824 - Other amortization 1,036,459 351,744 Gain on sale of assets - 9,184 Write-off of deferred loan costs - 869,906 Changes in assets and liabilities: Accounts receivable 10,573 220,037 Accounts payable (209,324) (822,183) Accrued expenses payable 1,054,386 (341,114) Other assets (302,587) 135,313 Other liabilities - (136,058) --------------- ------------- Net cash used in operating activities (564,470) (841,104) --------------- ------------- Cash flows from investing activities: Acquisition of Difco - (19,680,356) Purchases of property and equipment, including interest capitalized (7,718,834) (85,084) Proceeds from sale of property and equipment 1,971 379,809 --------------- ------------- Net cash used in investing activities (7,716,863) (19,385,631) --------------- ------------- Cash flows from financing activities: Payments on long-term debt - (22,566,762) Proceeds from issuance of long-term debt (480,000) 38,141,876 Proceeds from notes payable 9,557,754 1,500,000 Deferred loan costs - (1,014,439) Proceeds from issuance of common stock - 6,360,000 --------------- ------------- Net cash provided by financing activities 9,077,754 22,420,675 --------------- ------------- Net increase in cash 796,421 2,193,940 Cash and cash equivalents at beginning of period 286,158 408,439 --------------- ------------- Cash and cash equivalents at end of period $ 1,082,579 $ 2,602,379 =============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 935,762 $ 1,170,060 =============== ============= Supplemental schedules of noncash investing and financing activities: Convertible shares issued to Difco shareholders $ - $ 7,208,000 Ordinary shares issued for settlement of advisory and banking fees - 772,000 Overriding royalty interest conveyed to bank - 2,100,000
See accompanying notes to consolidated condensed financial statements 5 A. Summary of Significant Accounting Policies Basis of Presentation - --------------------- Alliance Resources PLC (the "Company" or "Alliance") is organized as a public limited company under the laws of England and Wales. Alliance is a London- based holding company of a group whose principal activities are the exploration, development, and production of oil and gas and the acquisition of producing oil and gas properties. Alliance was incorporated and registered under the laws of England and Wales on August 20, 1990. Alliance's corporate headquarters is located at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135. The condensed consolidated financial statements of Alliance Resources PLC and its wholly-owned subsidiaries (the "Company") reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company as of October 31, 1999, and for all interim periods presented. All adjustments are normal recurring accruals. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's April 30, 1999 audited consolidated financial statements and notes thereto contained in the Company's Annual Report to Stockholders for the year ended April 30, 1999. The results of operations for the period ended October 31, 1999, are not necessarily indicative of the operating results to be achieved for the full year. B. Significant Events On July 23, 1999 the Company announced that the Dalton R2 well has been successfully reentered and recompleted. The R2 well tested at a maximum flow rate of approximately 54 MMSCF/D on a 120/64 inch choke at 772 psig flowing tubing pressure. In the East Millom Field, the Millom Q1 well has been successfully reentered and recompleted. The Q1 well tested at a maximum flow rate of 18 MMSCF/D on a 68/64 inch choke at 725 psig flowing tubing pressure. The Dalton R1, R2 and Millom Q1 wells have been tied back to the North Morecambe Bay Platform, and first production began on August 10, 1999. Effective July 30, 1999, the Company and its principal lenders agreed to amend the terms of its credit agreement to allow for additional immediate borrowings of $5,000,000, to defer the date of the borrowing base and collateral value redetermination under Tranche A from July 31, 1999 to December 31, 1999, and to defer the repayment date of a portion of the indebtedness from January 31, 2001 to July 31, 2001. American Rivers Oil Company ("American Rivers") and Alliance announced that on July 22, 1999, they entered into a preliminary agreement, under which a new subsidiary of American Rivers, (AROC) would make a share for share offer for Alliance. On November 18, 1999, the American Rivers shareholders approved the merger of American Rivers with another new subsidiary of American Rivers. The merger was approved by the holders of more than 67% of the outstanding shares of American Rivers. As a result of the 6 merger, one share of American Rivers has been converted into the right to receive 0.11 shares of the common stock of AROC. On December 7, 1999, pursuant to the recommended offer made by AROC for all of the issued share capital of Alliance (the "Offer") acceptances in respect of 38,071,995 Alliance shares, representing 80.2% of the issued share capital of Alliance had been received. The Offer has now been declared unconditional in all respects. Pursuant to the terms of the Offer, AROC will continue to accept acceptances from Alliance shareholders until further notice, although Alliance shareholders who have accepted the Offer no longer have a right of withdrawal. If AROC receives acceptances in respect of 90% or more of Alliance's issued share capital, AROC intends to pursue a process of compulsory acquisition of the remaining Alliance shares under sections 429-430F of the Companies Act 1985. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------- Results of Operations - --------------------- The following is a discussion of the results of operations of the Company for the six months ended October 31, 1999. The factors which most significantly affect the Company's results of operations are (i) the sales prices of crude oil and natural gas, (ii) the level of total sales volumes, (iii) the level of lease operating expenses, and (iv) the level of and interest rates on borrowings. Total sales volumes and the level of borrowings are significantly impacted by the degree of success the Company experiences in its efforts to acquire oil and gas properties and its ability to maintain or increase production from its existing oil and gas properties through its development activities. The following table reflects certain historical operating data for the periods presented. Six Months Ended October 31 1999 1998 US UK US UK ----------- ----------- Net Sales Volumes: Oil (Mbbls) 156 - 154 - Natural Gas (Mmcf) 842 528 828 - Oil Equivalent MBOE) 296 88 292 - Average Sales Prices (includes hedging activity): Oil (per Bbl) $13.44 - $15.70 - Gas (per Mcf) $ 2.16 $1.70 $ 1.88 - Operating Expenses per BOE of Net Sales: Lease operating $ 7.04 $3.41 $ 4.36 - Severance tax $ .77 - $ .64 - Depreciation, depletion, and amortization $ 3.25 $4.64 $ 3.91 - General and administrative $ 3.99 $4.56 $ 5.41 - 7 Average sales prices received by the Company for oil and gas have historically fluctuated significantly from period to period. Fluctuations in oil prices during these periods reflect market uncertainties as well as concerns related to the global supply and demand for crude oil. Average gas prices received by the Company fluctuate generally with changes in the spot market for gas. Relatively modest changes in either oil or gas significantly impact the Company's results of operations and cash flow and could significantly impact the Company's borrowing capacity. Three Months Ended October 31, 1999 compared to the Three Months Ended ---------------------------------------------------------------------- October 31, 1998 ---------------- Total revenues from the Company's operations for the quarter ended October 31, 1999 were $3,311,774 compared to $2,031,805 for the quarter ended October 31, 1998. Revenues increased significantly over the comparable period a year earlier due principally to higher oil and gas prices, and additional revenues received from the UK properties which began producing in August 1999. Total operating expenses increased to $3,969,282 for the quarter ended October 31, 1999 compared to $1,954,311 for the same period in 1998. This increase was primarily due to increases in lease operating expense and impairment attributable to the UK properties. Lease operating expenses were higher at $1,656,134 for the three-month period ending October 31, 1999 compared to $493,204 for the same period in 1998. This was due to increases in workover expenses associated with raising production volumes in order to take advantage of higher oil and gas prices, three months of expenses related to first production from the UK properties and increased production taxes due to higher oil and gas prices. Impairment of oil and gas properties amounted to $500,000 for the quarter ended October 31, 1999 compared to $0 for the same period in 1998 due to ceiling test limitations related to the UK properties. A net operating loss of $657,508 was realized for the quarter ended October 31, 1999 compared to a net operating gain of $77,494 for the same period in 1998. Interest expense increased from $550,790 for the quarter ended October 31, 1998, to $2,007,000 for the quarter ended October 31, 1999 as a result of the increase in long-term debt and the amortization of discounts related to long-term debt all of which related to the financing of the UK properties. The write-off of $869,906 of deferred loan costs related to the previous credit facility, which was replaced with a new facility in association with the acquisition of the UK properties. Miscellaneous income increased to $338,520 for the three months ended October 31, 1999, from miscellaneous expense of $82,653 for the three months ended October 31, 1998, due to the favorable settlement of a lawsuit. In summary, due to the above factors, the net loss for the common shareholders for the quarter ended October 31, 1999 increased to $2,316,119 ($0.04 per share) compared to a net loss of $1,418,998 ($0.05 per share) for the same period in 1998. 8 Six Months Ended October 31, 1999 compared to the Six Months Ended ------------------------------------------------------------------ October 31, 1998 ---------------- Total revenue from the Company's operations for the six months ended October 31, 1999, was $4,798,635 compared to $3,949,771 for the six months ended October 31, 1998. Revenue increased significantly over the comparable period a year earlier due principally to higher oil and gas prices, and additional revenues received from the UK properties which began producing in August 1999. Total operating expenses increased to $8,064,486 for the six months ended October 31, 1999, compared to $4,183,283 for the same period in 1998. This increase was primarily due to the increases in lease operating expense, and impairment attributable to the UK properties. Lease operating expenses increased to $2,613,061 in the 1999 period compared to $1,462,559 for the six- month period ended October 31, 1998. This was due to increases in workover expenses associated with raising production volumes in order to take advantage of higher oil and gas prices, three months of expenses related to first production from the UK properties and increased production taxes due to higher oil and gas prices. Impairment of oil and gas properties amounted to $2,499,824 for the six-month period ended October 31, 1999, compared to $0 for the six- month period ended October 31, 1998, due to ceiling test limitations relating to the UK properties. Consequently, the net operating loss of $3,265,851 for the six-month period ended October 31, 1999, reflects an increase over the net operating loss of $233,512 for the six-month period ended October 31, 1998. The increase in net loss to $6,023,563 for the six-month period ended October 31, 1999, from $2,269,985 is due primarily to the factors mentioned above and the increase in interest expense. Interest expense increased to $3,126,792 for the six-month period ended October 31, 1999, from $1,219,240 for the 1998 period due to the increase in long-term debt and the amortization of discounts related to long-term debt all related to financing the UK properties. The write-off of $869,906 of deferred loan costs related to the previous credit facility, which was replaced with a new facility in association with the acquisition of the UK properties. Miscellaneous income increased to $352,834 for the six months ended October 31, 1999, from $49,741 in the 1998 period due to the favorable settlement of a lawsuit. Capital Resources and Liquidity - ------------------------------- The Company's capital requirements relate primarily to the development of its oil and gas properties and undeveloped leasehold acreage, exploration activities, and the servicing of the Company's debt. In general, because the Company's oil and gas reserves are depleted by production, the success of its business strategy is dependent upon a continuous exploration and development program and the acquisition of additional reserves. Cash Flows and Liquidity. At October 31, 1999, Alliance had current assets of - ------------------------ $3.267 million and current liabilities of $9.701 million, which resulted in a net current deficit of $6.434 million. Since April 30, 1999, the net current deficit has increased from $5.621 million to its current position of $6.434 million. Current liabilities at October 31, 1999, increased to $9.701 million compared to $8.072 million at April 30, 1999. The increase was due primarily to the increase in the current portion of long-term debt and the increase in accrued liabilities. 9 For the six months ended October 31, 1999, net cash used in the Company's operating activities was $.564 million compared to cash used of $.841 million for the six months ended October 31, 1998. This improvement is substantially due to the timing of collection of accounts receivable and payment of accounts payable in the six months ended October 31, 1999. Investing activities of the Company used $7.717 million in net cash flow for the six months ended October 31, 1999 compared to $19.386 million used for the six months ended October 31, 1998. The decrease was principally due to the acquisition of Difco, which occurred during the six months ended October 31, 1998, offset by the capital expenditures incurred in the UK over the current six-month period. Financing activities provided $9.078 million in the six months ended October 31, 1999, compared to cash provided of $22.421 million in the six months ended October 31, 1998. Overall, cash and cash equivalents increased by $.796 million in the quarter ended October 31, 1999 compared to an increase of $2.194 million in the 1998 period. Capital Expenditures. The timing of most of the Company's capital expenditures - -------------------- is discretionary. Currently, there are no material long-term commitments associated with the Company's U.S. capital expenditure plans. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The Company primarily uses internally generated cash flow to fund U.S. capital expenditures, other than significant acquisitions, and to fund its working capital deficit. If the Company's internally generated cash flows should be insufficient to meet its banking or other obligations, the Company may reduce the level of discretionary U.S. capital expenditures or increase the sale of non-strategic oil and gas properties in order to meet such obligations. The timing of the Company's U.K. capital expenditures is determined annually by a budget prepared by Burlington Resources and approved by Alliance. Currently, there is a commitment of $3,000,000 for the 2000 fiscal year. These commitments will be met by funds available under the Company's credit facility and internally generated cash flow. The level of the Company's capital expenditures will vary in future periods depending on energy market conditions and other related economic factors. (This is a forward-looking statement; refer to the Cautionary Statement Regarding Forward Looking Statements). Financing Arrangements. The Company was not in compliance with certain - ----------------------- covenants of the loan agreements at July 30, 1999, which included but were not limited to the maintenance of minimum levels of working capital and interest coverage. At July 30, 1999, prior to these violations causing an event of default, which would have resulted in an acceleration of the repayment of the loans, the Company obtained waivers from the lenders for all covenant violations. Effective July 30, 1999 the loan agreement was amended to revise the borrowing limit of Tranche B to $25,000,000 and reduce the limit of Tranche A to a similar amount. This enabled the Company to borrow an additional $5,000,000 as of July 30, 1999. The due date of Tranche B was extended from January 31, 2001 to July 31, 2001. In addition, the date of the borrowing base and collateral value redetermination scheduled to occur on July 31, 1999 was deferred until December 31, 1999. Financial Condition. The accompanying financial statements have been prepared on - ------------------- a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company continues to incur losses, continues to experience working capital deficits and is obliged to commence repayments on the borrowings on October 10 30, 2000. These factors among others may indicate the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Despite its negative cash flow, the Company has been able to secure financing to support its operations to date. As noted above the Company reached agreement with its principal lenders to amend certain provisions of the loan agreement to allow for additional borrowing capacity under Tranche B, to defer the borrowing base redetermination date under Tranche A from July 31, 1999, to December 31, 1999, and extend the repayment due date to July 31, 2001. The amendment does not, however, change the scheduled repayment dates of Tranche A, which commence on October 30, 2000. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to continue to comply with the terms of its borrowing agreements, to obtain additional financing or refinancing as will be required and ultimately to attain profitability. Management believes it has a business plan that, if successfully executed, will achieve these objectives. (This is a forward-looking statement; refer to the Cautionary Statement Regarding Forward Looking Statements). Seasonality. The results of operations of the Company are somewhat seasonal due - ------------ to fluctuations in the price for crude oil and natural gas. Recently, crude oil prices have been generally higher in the third calendar quarter, and natural gas prices have been generally higher in the first calendar quarter. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results which may be realized on an annual basis. Inflation and Prices. In recent years, inflation has not had a significant - -------------------- impact on the operations or financial condition of the Company. The generally downward pressure on oil and gas prices during most of such periods has been accompanied by a corresponding downward pressure on costs incurred to acquire, develop, and operate oil and gas properties as well as the costs of drilling and completing wells on properties. Prices obtained for oil and gas production depend upon numerous factors that are beyond the control of the Company including the extent of domestic and foreign production, imports of foreign oil, market demand, domestic and world-wide economic and political conditions, and government regulations and tax laws. Prices for oil and gas have fluctuated significantly in recent years. The following table sets forth the average price (includes hedging activity) received by the Company. Oil Gas-US Gas-UK ------ ------ ------ Six months ended October 31, 1999 $13.44 $2.16 $1.70 Year ended April 30, 1999 $13.20 $1.79 - During February 1999 the Company completed a transaction to hedge approximately 65% of its existing monthly gas production by installing a floor of $1.60/MMBTU and a cap of $2.07/MMBTU. This has protected the Company from any severe declines in natural gas prices and conversely limited the benefit of prices in excess of the cap. During April 1999 the 11 Company completed a transaction to hedge approximately 40% of its existing monthly oil production by installing a floor of $12.00/barrel. This has protected the Company from any severe declines in oil prices. Both of the above mentioned hedges expired on October 31, 1999. The Company recently completed transactions to hedge approximately 33% of its monthly oil production by installing a floor of $19.00/barrel and a cap of $24.00/barrel through June 2000. The Company also completed a transaction to hedge approximately 65% of its monthly U.S. gas production by installing a floor of $2.40/MMBTU and a cap of $3.00/MMBTU through October 2000. ISSUES RELATED TO THE YEAR 2000 - ------------------------------- General. The following Year 2000 statements constitute a Year 2000 Readiness - ------- Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. The Year 2000 problem has arisen because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize and process date-sensitive information beyond 1999. In general, there are two areas where Year 2000 problems may exist for the Company: information technology such as computers, programs and related systems ("IT") and non-information technology systems such as embedded technology on a silicon chip ("Non IT"). The Plan. Alliance's Year 2000 Plan (the "Plan") has four phases: (i) - --------- assessment, (ii) inventory, (iii) remediation, testing and implementation and (iv) contingency plans. Approximately fifteen months ago, the Company began its phase one assessment of its particular exposure to problems that might arise as a result of the new millennium. The assessment and inventory phases have been completed and have identified Alliance's IT systems had to be updated or replaced in order to be Year 2000 compliant. Remediation, testing and implementation were completed by September 30, 1999, and the contingency plans phase of the Plan was completed by December 15, 1999. Alliance's assessment of the readiness of third parties whose IT systems might have an impact on Alliance's business has thus far not indicated any material problems. With regard to Alliance's Non IT systems, the Company believes that most of these systems have been brought into compliance. Alliance's assessment of third party readiness has also been completed. Because the potential problem with Non IT systems involves embedded chips, it is difficult to determine with complete accuracy where all such systems are located. As part of its Plan, the Company has made formal and informal inquiries of its vendors, customers and transporters in an effort to determine the third party systems that might have embedded technology requiring remediation. Estimated Costs. Although it is difficult to estimate the total costs of - --------------- implementing the Plan through January 1, 2000 and beyond, Alliance's preliminary estimate is that such costs will not be material. To date, the company has spent less than the budgeted $50,000 and does not foresee any significant additional costs going forward. However, although management believes that its estimates are reasonable, there can be no assurance, for the reasons stated in the next paragraph, that the actual cost of implementing the Plan will not differ materially from the estimated costs. Potential Risks. The failure to correct a material Year 2000 problem could - --------------- result in an interruption in, or a failure of, certain normal business activities or operations. This risk exists both as to Alliance's IT and Non IT systems, as well as to the systems of third parties. Such 12 failures could materially and adversely affect Alliance's results of operations, cash flow and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third party suppliers, vendors and transporters, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on Alliance's results of operations, cash flow or financial condition. Although the Company is not currently able to determine the consequences of Year 2000 failures, its current assessment is that its area of greatest potential risk in its third party relationships is in connection with the transporting and marketing of the oil and gas produced by the Company. The Company is contacting the various purchasers and pipelines with which it regularly does business to determine their state of readiness for the Year 2000. Although the purchasers and pipelines will not guaranty their state of readiness, the responses received to date have indicated no material problems. The Company believes that in a worst case scenario, the failure of its purchasers and transporters to conduct business in a normal fashion could have a material adverse effect on cash flow for a period of six to nine months. Alliance's Year 2000 Plan is expected to significantly reduce Alliance's level of uncertainty about the compliance and readiness of these material third parties. The evaluation of third party readiness will be followed by Alliance's development of contingency plans. Cautionary Statement Regarding Forward-Looking Statements. In addition, the - --------------------------------------------------------- dates for completion of the phases of the Year 2000 Plan are based on Alliance's best estimates, which were derived using numerous assumptions of future events. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-parties and the interconnection of computer systems, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business. Accordingly, shareholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected, estimated or predicted. Item 3. Quantitative and Qualitative Analysis on Market Risk - ------------------------------------------------------------- The Company's primary market risks relate to changes in interest rates and in the prices received from sales of oil and natural gas. The Company's primary risk management strategy is to partially mitigate the risk of adverse changes in its cash flows caused by increases in interest rates on its variable rate debt, and decreases in oil and natural gas prices, by entering into derivative financial and commodity instruments, including swaps, collars and participating commodity hedges. By hedging only a portion of its market risk exposures, the Company is able to participate in the increased earnings and cash flows associated with decreases in interest rates and increases in oil and natural gas prices; however, it is exposed to risk on the unhedged portion of its variable rate debt and oil and natural gas production. Historically, the Company has attempted to hedge the exposure related to its variable rate debt and its forecasted oil and natural gas production in amounts which it believes are prudent based on the prices of available derivatives and, in the case of production hedges, the Company's deliverable volumes. The Company attempts to manage the exposure to adverse changes in the fair value of its fixed rate debt agreements by issuing fixed rate debt only when business conditions and market conditions are favorable. The Company does not use or hold derivative instruments for trading purposes nor does it use derivative instruments with leveraged features. The Company's derivative instruments are 13 designated and effective as hedges against its identified risks, and do not of themselves expose the Company to market risk because any adverse change in the cash flows associated with the derivative instrument is accompanied by an offsetting change in the cash flows of the hedged transaction. However, location basis differences between NYMEX prices and spot prices present the risk of an ineffective hedge. Personnel who have appropriate skills, experience and supervision carry out all derivative activity. The personnel involved in derivative activity must follow prescribed trading limits and parameters that are regularly reviewed by senior management. The Company uses only well-known, conventional derivative instruments and attempts to manage its credit risk by entering into financial contracts with reputable financial institutions. Following are disclosures regarding the Company's market risk sensitive instruments by major category. Investors and other users are cautioned to avoid simplistic use of these disclosures. Users should realize that the actual impact of future interest rate and commodity price movements will likely differ from the amounts disclosed below due to ongoing changes in risk exposure levels and concurrent adjustments to hedging positions. It is not possible to accurately predict future movements in interest rates and oil and natural gas prices. Interest Rate Risks (non-trading). The Company uses both fixed and variable rate - --------------------------------- debts to partially finance operations and capital expenditures. As of October 31, 1999, the Company's debt consists of $48,389,521 in borrowings under its Credit Agreement which bear interest at a variable rate, and $10,762,175 in borrowings under its 10% Senior Subordinated Notes which bear interest at a fixed rate. The Company hedges a portion of the risk associated with its variable rate debt through derivative instruments which consist of interest rate swaps and collars. Under the swap contracts, the Company makes interest payments on its Credit Agreement as scheduled and receives or makes payments based on the differential between the fixed rate of the swap and a floating rate plus a defined differential. These instruments reduce the Company's exposure to increases in interest rates on the hedged portion of its debt by enabling it to effectively pay a fixed rate of interest or a rate, which only fluctuates within a predetermined ceiling and floor. A hypothetical increase in interest rates of two percentage points would cause a loss in income and cash flows of $484,000 during the current fiscal year, assuming that outstanding borrowings under the Credit Agreement remain at current levels. This loss in income and cash flows would be offset by a $0 increase in income and cash flows associated with the interest rate swap and collar agreements that are in effect for the current fiscal year. A hypothetical decrease in interest rates of two percentage points would cause an increase in the fair value of $0 in the Company's Senior Subordinated Notes from their fair value at October 31, 1999. Commodity Price Risk (non-trading). The Company hedges a portion of the price - ----------------------------------- risk associated with the sale of its oil and natural gas production through the use of derivative commodity instruments, which consist of collars and participating hedges. These instruments reduce the Company's exposure to decreases in oil and natural gas prices on the hedged portion of its production by enabling it to effectively receive a fixed price on its oil and natural gas sales or a price that only fluctuates between a predetermined floor and ceiling. As of December 1, 1999, the Company had entered into derivative commodity hedges covering an aggregate of 52,500 barrels of oil and 825,000 MMbtu's of gas that extend through June and October 2000 respectively. Under these contracts, the Company sells its oil and natural gas production at spot market prices and receives or makes payments based on the differential between the NYMEX 14 contract price and a floating price which is based on spot market indices. Therefore, the Company is exposed to basis differences between NYMEX prices and spot prices. The amount received or paid upon settlement of these contracts is recognized as oil or natural gas revenues at the time the hedged volumes are sold. A hypothetical decrease in oil and natural gas prices of 10% from the price in effect as of October 31, 1999, would cause a loss in income and cash flows of $752,000 during the current fiscal year, assuming that oil and gas production remain at current levels. This loss in income and cash flows would be offset by a $0 increase in income and cash flows associated with the oil and natural gas derivative contracts that are in effect. 15 PART II - OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits SEC Exhibit No. Description of Exhibits ------- ----------------------- (27) Financial Data Schedule ----------------------- *27.1 Financial Data Schedule of Alliance Resources PLC *Filed Herewith. (b) Reports on Form 8-K ------------------- None 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Alliance Resources PLC /s/M. Humphries ------------------------------------------ Michael Humphries, Finance Director Date: December 20, 1999 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS APR-30-2000 APR-30-1999 AUG-01-1999 AUG-01-1998 OCT-31-1999 OCT-31-1998 1,082,579 2,602,379 0 0 2,094,509 1,881,403 0 0 0 0 3,266,937 4,512,525 81,802,605 72,148,869 (48,355,774) (15,563,453) 39,996,483 64,559,290 9,701,085 10,641,207 0 0 0 0 0 0 20,658,590 20,658,590 (43,318,893) (5,101,651) 39,996,483 64,559,290 3,311,774 2,031,805 3,311,774 2,031,805 1,656,134 493,204 3,969,282 1,954,311 (348,389) 945,702 0 0 2,007,000 550,790 (2,316,119) (1,418,998) 0 0 (2,316,119) (1,418,998) 0 0 0 0 0 0 (2,316,119) (1,418,998) (0.04) (0.05) (0.04) (0.05)
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